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Top performing largecaps of FY12 - Views on News from Equitymaster
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  • Apr 2, 2012

    Top performing largecaps of FY12

    The financial year 2011-2012 (FY12) was a rollercoaster year for the Indian stock markets with the BSE-Sensex fluctuating between levels of 16,000 and 18,000 for most part of the year. As compared to a year ago, the BSE-Sensex declined by about 11%. In this article, we have focused on largecaps and as such will be discussing the best performing stocks forming part of the BSE-100 Index. The list goes as follows - Idea Cellular (telecom), Hindustan Unilever Ltd. (FMCG), Colgate-Palmolive (FMCG), Indiabulls Financial Services (NBFC) and UltraTech Cement (cement).

    Idea Cellular (returns in FY12 - 46%; returns in FY11 - 3%)

    Sometimes bad news for competitors can translate into good news for one. And this is exactly what happened with Idea Cellular. Idea emerged as the top performing stock in FY12, with returns of about 46% over the last year. The sectoral index it is part of, the BSE-Teck Index declined by 8% during the year.

    As competition on the tariff front started to wane of, it severely hurt the prospects of the smaller companies which were competing purely on the price front and hence bleeding in their financials. At the same time, companies like Idea Cellular took a bold step to start increasing tariffs gradually. Despite this, the company's active subscriber base continued to expand. In fact, the company gained favorably on the MNP (Mobile Number Portability) front. By the end of FY12, the Supreme Court cancelled the 2G licenses of the new players. This again worked in the favour of Idea's stock price as it became one of the favoured ones to gain from the plight of the losing companies. Experts and investors expect the company to gain the subscriber shares from the companies whose licenses have been cancelled. Another aspect that worked in the favour of the company to some extent was the slower than expected turnaround in Bharti Airtel's African operations. As investors continued to grow wary of the incumbent, they started to focus more attention on the other listed player i.e. Idea Cellular.

    Hindustan Unilever or HUL (returns in FY12 - 44%, returns in FY11 - 1%) and Colgate-Palmolive (returns in FY12 - 37%; returns in FY11 - 21%)

    FMCG behemoth, HUL and Colgate emerged amongst the top performing large cap stocks last year. In fact, these stocks have outperformed the BSE-FMCG index, which increased by 25% YoY, by a strong margin. While HUL's stock rose by 44%, Colgate's stock gave 37% return in the last 12 months.

    The key reasons behind these stocks outperforming their peers have been their strong operating performances. This was especially at a time when concerns were raised relating to how FMCG companies would battle the high commodity inflation during last year. Not to mention that stocks from this sector tend to be a fall back for investors as they invest in defensive sectors during difficult times. As FMCG companies have relatively stable earnings and provide good dividends, regardless of the state of the overall stock markets, these stocks are preferred by investors during times of uncertainty. Over the long term, the overall FMCG sector has been touted to do well on the back of India's consumption led growth story. Coming to the operating performance of these companies, both saw strong growth in terms of volumes and revenues over the last year. During 9mFY12, HUL's sales grew by 16% YoY while it's operating profits increased by 24% YoY. The improvement at the operating level was mainly due calibrated price hikes and rationalization in advertisement spends. For Colgate, the situation was similar, albeit, mainly in the latest reported quarter. During the 9mFY12 period, the company's revenues grew by 18% YoY, while operating profits increased by 9% YoY only. However, during the quarter ended December 2011, profit growth of 75% YoY far surpassed the 20% YoY growth clocked in sales. Decline in advertisement and promotional expenses were again, the reason for this improvement in performance.

    Indiabulls Financial Services (returns in FY12 - 35%; returns in FY11 - 47%)

    With yearly returns of 35% YoY, Indiabulls Financial Services had a stellar run on the bourses over the past fiscal mainly on account of its robust financial performance. For the first nine months of the fiscal, the company saw a revenue growth of 57% YoY and a profit after tax growth of 37% YoY. The previous 9 month period had a one-time income from the sale of a stake in Indian Commodity Exchange. Adjusting for this, the growth this year would have been even higher. Advances also saw robust growth of 39.5% YoY over the period and asset quality also improved. For the past nine quarters the company has seen a continuous reduction in Gross and Net NPA levels. It maintains healthy liquidity levels and has reduced its reliance on short term borrowings adding to comfort. The company has also improved its operating efficiency with its cost to income improving to 18.7% in 3QFY12 from 21.1% in 3QFY11.

    Ultratech Cement (returns in FY12 - 33%; returns in FY11 - (2%))

    In March 2010, the Reserve Bank of India (RBI) kicked off its combat against rising inflation. Over the year and a half that followed, it raised key interest rates more than a dozen consecutive times. This severely affected the housing, construction and infrastructure industry, the main consumers of cement. So while the Indian central bank battled with inflation, the cement industry was struggling through a tough down cycle. Every variable seemed to be out of favour for the sector. Demand was muted. Excess capacity kept cement prices under pressure. To add to that, input costs rose significantly. However, in recent months, the business scenario has witnessed some revival. Cement demand picked up post the monsoons. Prices have also firmed up. Moreover, the fact that the RBI has halted further hikes in interest rates is a likely indication that the interest rate cycle has peaked. These factors caused a huge rally in cement stocks over the last three months. This is the key reason for UltraTech Cement's outperformance.


    As you can see, the top performing stocks have been the investing communities' favorites for varied reasons. Apart from the good operating performances of these companies, the outperformance had a lot to do with the investor sentiments and factors affecting the overall economic environment.

    With this year's Union Budget being announced recently and the RBI hinting at a reduction in interest rates over time, the focus going forwards would be on growth and achieving a higher GDP growth. This will put companies that have been impacted because of reasons such as interest rate hikes, high input costs and slowing demand - basically sectors that have underperformed over the last year - back in focus. One would do well to focus good quality companies from these sectors. To put things in perspective, the top three underperforming sectoral indices during FY12 were the BSE-Metal, BSE-Capital Goods and BSE-Realty indices which declined by 30%, 24% and 24% respectively. For investors wishing to continue with a conservative investment strategy and looking at investing in defensive stocks, they would do well by studying the long term prospects of the industry (as well as the company). This is of course, considering that they pay the right price for the stock.

      Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.



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